Economics For Dummies

It’s nearly a year ago now that the leaders of the three main parties in the UK held those TV debates, but you will probably remember the talk of cutting the budget deficit, which was at that time approximately £150 billion. David Cameron was arguing that the deficit needed to be cut, while Gordon Brown was convinced that it should wait until the economy was growing healthily again.

I get the impression many people don’t really understand what is meant by a budget deficit.

A budget deficit is like running into the overdraft of your bank account, and instead of paying off its overdraft, the government was going £150 billion further into debt each year.

Like going into your overdraft, a budget deficit should be avoided as much as possible. It’s understandable that it might happen during difficult times like we’re in at the moment, but you want to minimise how long you spend in your overdraft because your bank charges interest on the money you borrow.

Here’s a graph that shows the state of the government’s bank account from 2002-2009:

The red bars show, very simply, how much the government borrowed each year between 2002 and 2009. The green line shows what those bars adds up to. That’s not the total debt, because it doesn’t include any debt accumulated before 2002, and neither does it count the interest the government owes to its lenders. But it’s clear that the Labour government was into its overdraft even before the recession, when times were good.

The government can’t go on borrowing indefinitely. At the moment we still have a pretty good reputation for repaying debts, so lenders are happy to trust us with their money, and they’re charging relatively little interest, but if we don’t start repaying that money at some point, that won’t last.

Students are worried about the prospect of being in debt for most of their lives having taken on a student loan, and yet many people seem oblivious to the government’s debt, and the interest building up on it.

Just to give you an idea how much debt we’re in, how much interest we’re paying (despite the relatively low rate), and how much better we could be using our money, here’s a quote from Nick Clegg:

“This year we’ll be spending over £43bn just on the interest on our debts.

That’s £830m per week. Just under £119m a day. For that money, we could build a new primary school every hour. We could buy a new Chinook helicopter every day. We could take 11 million people out of paying income tax. We could triple the number of doctors in our hospitals.”

If the government is going to start paying back its debt so we can start buying useful things rather than spending so much on interest, it will first have to make sure its income is greater than the amount it spends each year. This is what they mean by reducing the budget deficit; they need to turn it into a surplus.

There are two ways to work towards this. The government needs to either cut its spending, or increase its income, or both.

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First, let’s talk about cuts.

Ed Balls would argue that no cuts need to be made. He would claim that it is necessary to maintain spending to encourage the economy to grow, and that income will eventually catch up with spending so the debt can be repaid.

I will try to explain simply the folly of that idea.

There are two types of jobs in the UK:

A private sector employee works for a business that pays the employee’s wages out of its profits.

A public sector employee works for the government, which pays the employee’s wages out of the taxes it collects from the private sector.

Basically, Labour’s idea is that by giving people public sector jobs (i.e. they work for the government), those people will have money to spend, and if people are spending, the economy will grow.

The problem with this is, for the government to make a profit from one of its public sector employees, it needs more than 100% of the salary it’s paid to come back in taxes.

Let’s have a look at how plausible that is:

Think about what a typical employee spends their wages on: mortgage/rent, fuel bills, food, etc…

Take food for example: some of the price of the food is VAT, so the government gets a bit back there… the shop that sold them the food pays some tax, so the government gets a bit back there too… and the shop will have more money to spend on other things than it might have otherwise, so the government might get some more tax that way too… but these amounts are just ever decreasing fractions of the original salary paid out by the government, and the actual cost of the food or house or fuel never gets back to the government. The government is not going to get back more than it put in.

Government spending accounts for about half of our GDP, i.e. the government wants to spend about as much as the entire private sector.

But remember that the private sector ultimately has to pay the government’s bills as well as its own, so for the government to be able to afford to spend that much, it’s taking a huge amount of tax off the people and businesses that are actually creating wealth.

Obviously no one likes paying a lot of tax, but for many of these private sector companies – and hence for the government which is relying on them – a high tax rate actually causes serious problems.

It means that companies can’t afford to employ so many people, so they have to lay them off (or at least can’t take on as many as they would otherwise). Labour’s solution is to create more jobs in the public sector for those redundant people to do instead (who cares about efficiency anyway?). In order to pay these people a salary, the government needs to collect more taxes from the private sector, and a bigger tax bill makes it even more difficult for private sector firms to pay employees so they have to make more people redundant. It’s a vicious circle: raising taxes means people in the private sector lose their jobs; giving those people jobs in the public sector instead means the government has to raise taxes even higher to pay for them.

If you ever watch the BBC’s Question Time, you will have heard people questioning the Con-Lib representatives on whether the private sector will create enough jobs to make up for the losses from the public sector.

The simple answer is: it has to. Encouragingly “the number of private sector jobs rose by 428,000 in the year to December. Over that time, the public sector shed 132,000 jobs”, but whether that was already happening or not, the cuts need to happen.

The government needs money, and keeping so many people employed in the public sector will only make the situation worse. This seems very uncaring towards the people who will lose their jobs in the short term, but I’m afraid there is no other option, and in the short term, yes, it will be painful for many, I wish it didn’t have to be, but I will later go on to explain how the vicious circle will work in reverse.

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So how can the government increase its income?

I implied before that the answer is to raise taxes. Actually, I intend to show that the opposite is true.

This chart shows top tax rates in the US, compared with the income the government received from those taxes:

You can see that, whether the top tax rate was 90% or 40%, the amount the government received was basically the same. The idea that taxing the rich more gives the government more money is clearly not true.

In fact, with lower tax rates, private sector companies would be more able to afford to employ people, and more people in private sector employment would mean the tax bill is shared out between more people; so each person can pay less, while the total the government receives actually increases.

This is the vicious circle in reverse: lower tax rates means more private sector jobs, more private sector jobs means the government can afford to charge each individual a lower rate and still get more money than it did before. Everybody wins!

I know that the government is cutting some worthy causes in order to achieve this, but going on with a budget deficit is just not clever. When the debt has been repaid, then that money we’re currently paying as interest on our debts can be used for useful projects like those described by Nick Clegg in the quote above.

The alternative is to build up a bigger and bigger debt to pass on to future generations and let them worry about paying it back. That’s basically stealing from your children.

For Christians, of course we want to look after the poor, but the Biblical principle, from Ephesians 4:28, is to work to have to give, you don’t take from others in order to give more than you can afford.

Are The New Tuition Fees Fair?

Some people seem to be a little bit annoyed by the government’s decision that students should pay up to £9000 a year for their degrees.

From what I’ve seen on the news, and Question Time, it seems a lot of people have a rather misconceived idea of what the changes actually mean. I think the way the media have presented the story hasn’t helped; I guess you’re going to sell more papers if you make government decisions look massively controversial. Plus you’ve got the Labour party, who are opposing every cut the government makes, but while they seem to acknowledge that the way universities are funded needs fixing (it was them that commissioned the Browne report in the first place), they can’t really agree among themselves on a viable alternative.

So I can understand why people are under the impression that the new system is unfair, but I hope that people will try to read the following with an open mind as I try to show you why the new system is, as crazy as this may sound, fairer than the old one.

I was going to try and explain it all in my own words, but then realised the Prime Minister already covered most of what I was going to say in this speech. I’m thinking the people who are most passionately against the new fees are probably inclined to automatically dislike everything in that speech just because it was David Cameron that delivered it, but please give him a chance. I think it’s worth a read, and if you’re willing to listen, I think you’ll see that they are being fair. Otherwise, I think the following still makes sense even if you don’t bother with the link:

I’d like to emphasise that people from poor backgrounds who go to university will be better off under the new system, while the people who don’t go, and end up doing low-paid jobs their whole lives instead, won’t have to pay for those that do.

The people who will take a hit under the new system are those who aren’t poor enough to receive grants, but aren’t rich enough to pay the fees up front to avoid the interest on their loan. People like me would have to pay our own way, rather than take money off non-graduates, and (although it’s easy for me to say this now that I’ve already got my degree) I think that’s fair.

I’ve heard two common arguments against this.

Firstly, it is claimed that everyone, including minimum wage-earners, benefits from university graduates working in our country, so everyone should contribute to the cost of educating them.

Secondly, it is pointed out that people received free university tuition in the past.

I think these would both have been valid arguments/points back when very few people went to university. When not many people went to university, it didn’t cost the government very much to pay for them. Plus, the degrees the students received were more valuable because they were rare, and those that possessed those degrees would have contributed significantly to a workforce that consisted mostly of relatively uneducated people.

Now, there are lots more people going to university, so if the government were still to pay for them, it would cost a lot more. Also, since so many people have degrees, graduates are much less in demand in the workplace, so having a degree doesn’t necessarily mean you’re contributing much to the country (right now my Master’s Degree in Mechanical Engineering is being put to good use as I serve coffee and do the washing up in a restaurant).

So firstly, I’d say that sending all these people to university no longer seems all that useful to non-graduates. There are some cases where there is still a clear benefit to everyone, e.g. training doctors, and if their salaries are not enough reward, then perhaps their tuition should still be paid for by the taxpayer. In most cases though, I think the benefit that non-graduates get from someone else doing a degree is negligible.

Secondly, it’s important to remember that no-one’s education was ever free. £9000 a year is the price UK universities will be charging for degrees. The only question is who pays that cost? Do the people who receive the degree pay? Or should everyone share the cost, including those who’ve never dreamed of going to university and are working in a factory on minimum wage? Take into account that the average increase in earnings over a lifetime as a result of having a degree is over £100,000. If you still think you can justify taking money off of the lowest-earning taxpayers to pay for your degree for you, then I guess you’re entitled to your opinion, but I think that’s actually pretty disgusting. You’re basically doing a Robin Hood in reverse, taking from the poor to reduce the debts of the future high-earners.

I also dislike the way society is saying you need a degree to get a decent job. To me, that seems to send a message to the people working in factories etc., that their jobs are pretty worthless. People shouldn’t be made to feel inferior because they don’t earn as much. Suggesting that these people benefit from having university graduates in the country, and should therefore help pay to create them, encourages the idea that they themselves are less valuable to the country. Graduates need people to do these low-paid jobs, and they should show their appreciation to the people willing to do them, not charge them for the privilege of having these people who’ve been to university and got important, highly-paid jobs, look down on them.

That said, I’m not against education. The government should do all it can to make sure the same opportunities are available to anyone who wants to go to university, and I think the Lib-Con system, when properly understood, does a better job of providing those opportunities to anyone than the previous system did.

So finally, if you’re put off going to university by the increase in fees, I’d like to firstly point out that someone has to pay for your tuition (lecturers don’t normally work for free!), and it might as well be you (it’s all very well insisting the government pays for you, but the government has no money of its own, it’s only using the money you give them through taxes). Secondly, you’re not being asked to pay a penny until you’ve finished and are earning over £21k a year, and even then, say  you were earning £23k a year, you would only pay back £15 a month. In practice, it’s very similar to paying for tuition using taxes, but only the people who go to uni will pay. Is that really worth smashing windows over?